Lets say I want a $100,000 mortgage. I can get it at x%, or (x-0.25)% if I pay 1 point. If I do the 1 point option, will my first payment be on a $99,000 balance, or a $100,000 balance? In other words does the point I pay go towards my mortgage or just as a fee to the lender?

3 Answers
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When you pay points on a mortgage, you're paying to offset interest. The payment is essentially a fee, and does not decrease principal.

In your example, if you pay $1,000 against a $100,000 mortgage, you're paying one point (one percent of the mortgage amount) and you're getting a .25% discount on interest as a result. You still owe $100,000 in principal. The advantage you're buying is a lower interest rate - which, if you plan to keep the house for a long time, can make a significant difference in the total interest you pay.

Essentially, paying points is a consumer betting that they will stay in the house for a long time (i.e. take a long time to pay the mortgage off).

This may be obvious, but a down payment is what it's called when you pay money upfront to decrease the principal. Both down payments and points will lower the total amount you pay back to the bank, but they work in very different ways. Down payments reduce the principal on the loan, while points reduce the interest paid. Which one is better for you will depend on how long you plan to keep the home, what your interest rate is, and other factors. Also, it's important to consider that mortgages are sometimes priced based on down payment size (i.e. the product you're offered at 5% down might have a different interest rate than the one you're offered at 20% down). And, a lower down payment often means that you'll be required to carry more PMI, which effectively raises your monthly payment. So - get the specifics on your deal, and check the numbers for each scenario, before deciding how to spend your money.

My LO explained it best as a "discount fee", you get a discount on the mortgage APR if you pay the fee, but that's it, nothing else. (His company calculated break-even for it at 7 years, so they recommend taking the discount rate if you expect to be in the house more than 7 years, and not taking it if you expect to be there less than 7 years.)
– Der KommissarSep 4 at 13:43

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Lenders will sometimes help make that break even calculation for you, or you can use one of many online calculators to do so. Something to consider, as @HartCO pointed out, is that there may be "better" things you can do with that money in the meantime besides putting it into your mortage.
– dwizumSep 4 at 13:48

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Also note that "be in the house for 7 years" can be expanded by "being in the house 7 years and not refinancing in that time either". It might be your "forever home", but a refi might be very attractive for one reason or another down the road.
– JPhi1618Sep 4 at 13:54

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@dwizum Mine was $450 or something for 0.25% off my rate, and I don't want to brag but I was not strapped for cash by any means. Definitely not saying everyone should do it, but if you can afford it and it makes sense, go for it.
– Der KommissarSep 4 at 13:55

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@JPhi1618 Absolutely, it's all a gamble, but buying a house and expecting anything about it financially is a gamble in general. The only thing guaranteed is your rate in a fixed-APR mortgage. The value of the house (which is what Refi's are based on) isn't guaranteed either. For me, $450 was worth the gamble. /shrug
– Der KommissarSep 4 at 14:01

No, points do not affect principal balance, they are just a fee to reduce interest rate over the life of the loan. If it were just extra principal payment you could just put more money down initially (which may or may not help your interest rate). Points are basically a way for them to get money up front rather than over 30 years, which is good for them, and depending on how much interest it saves you might be good for you too, but typically you could do better things with that money than buy points.